Hedging Annuity Risks with the Age-Period-Cohort Two-Population Gravity Model

Dowd, K.; Cairns, A.J.G.; Blake, D.

Abstract

We consider the effectiveness of an illustrative annuity hedging problem in which a forward annuity predicated on one population is hedged by a position in a forward annuity predicated on another population. Our analysis makes use of the age-period-cohort two-population gravity model that takes account of the observed interdependence between the two populations’ mortality rates; it also considers the implications of parameter uncertainty, individual death or Poisson risk, and interest-rate risk for hedge effectiveness. We consider horizons of up to 20 years. For the most part, our results are robust and indicate strong hedge effectiveness, with estimates of relative risk reduction varying from about 70% in the least effective case to well over 95% in the most effective cases.

Citation

Dowd, K., Cairns, A., & Blake, D. (2019). Hedging Annuity Risks with the Age-Period-Cohort Two-Population Gravity Model. North American Actuarial Journal, 25(sup1), S170-S181. https://doi.org/10.1080/10920277.2019.1652102

• Journal Article Type: Article
• Acceptance Date: Jul 30, 2018
• Online Publication Date: Nov 20, 2019
• Publication Date: 2019
• Deposit Date: Jan 2, 2018
• Publicly Available Date: May 20, 2020
• Journal: North American Actuarial Journal
• Print ISSN: 1092-0277
• Electronic ISSN: 2325-0453
• Publisher: Taylor and Francis Group
• Peer Reviewed: Peer Reviewed
• Volume: 25
• Issue: sup1
• Pages: S170-S181
• DOI: https://doi.org/10.1080/10920277.2019.1652102
• Public URL: https://durham-repository.worktribe.com/output/1342564